A new report by London First, in partnership with CBRE, released today (Friday) suggests that at the current rate of take-up of existing available industrial and logistics space, London and the South East would run out of suitable spots within five months.
The report considers the impact of the pandemic on three of London’s key commercial property sectors – logistics, offices and retail. As well as highlighting the pressure on logistics space, it also finds that despite a potential 9% reduction in demand for office space due to continued hybrid working, central London office space being let is set to remain above average at 13.5m sq ft per year – up from the 10-year average of 12.1m sq ft – as businesses clamour for bigger spaces to suit their needs.
Commenting on the findings, Richard Smart, Managing Director of London, CBRE said:
“London continues to hold its allure for occupiers, which has been reflected in the strong uptick in the leasing market at the end of Q4 2021. The trend towards occupiers seeking the best quality and amenity rich space is holding strong as businesses seek to magnetise the office. Pressure remains on the property sector to take action and actively decarbonise the built environment, which many businesses are building into their ESG strategies.
“Prime logistics rents in London will continue increasing over the next five years due to the continued expansion of online sales and delivery services, with units with less operational restrictions even more in demand. We expect that multi-storey developments and underground schemes will become increasingly common over the next few years.”
The logistics sector has seen an increase in demand over the course of the pandemic, with occupiers looking to improve their supply chain’s resilience to external shocks. The boom for the e‑commerce industry from consumer habits during lockdown has led to increased take up of space closer to central London to meet rising demands of quicker delivery times.
A 2020 survey of 100 major warehouse occupiers in Europe, undertaken by CBRE, showed that 42% required additional short-term storage during the first year of the pandemic, and 35% accelerated their transitions to online channels. However available logistics space is in short supply, and there is a lack of ready-to-occupy units – just 1.8% of total stock in London and the South East is available for rent, having been 6.2% in 2019.
Given these challenges, the report suggests that, to avoid running out of space, work is needed to encourage local areas to embrace last mile delivery uses on or near the high street, and that the government should consider housing growth in partnership with the need to support industrial and logistical growth to meet demand.
Paul Weston, Senior Vice President Regional Head UK, Prologis, said:
“There needs to be a better understanding of the vital role the sector plays and ensure there is a joined-up approach between housing growth and the need for more industrial and logistics space — given the nature of our economy you can’t have the former without the latter. This may require some bold thinking such as supporting logistics development on poor-quality greenbelt land.”
By contrast, office space has seen subdued demand compared to pre-pandemic levels. Prime rents declined across Central London in 2020, but rental values on high quality spaces began their recovery in 2021. However, there is strong demand for large office spaces– transactions over 50,000 sq ft accounted for 38% of the total take-up in 2021 and nearly three-quarters of those (74%) were within newly completed buildings or deals for pre-let space. This shows that businesses are still willing to pay for high-quality office space that makes it easier to transition to hybrid working and spaces with wellbeing in mind.
The report suggests that a flexible application of planning policy and property taxes may be required to prevent secondary office stock from remaining empty so that it can be used and improved, and that tax incentives many be required to encourage retrofitting to meet sustainability requirements.
In the report Paul Williams, Chief Executive, Derwent London, said:
“The days of the ‘let and forget’ relationship between landlord and tenant are long dead, and closer relationships with our customers are imperative. We are looking to provide more long-life, loose fit, low energy buildings that are adaptable; all driven by the broader challenge of addressing the climate emergency. The pandemic has increased our move towards net zero carbon and in turn given us a greater focus on providing ‘intelligent’, tech-enabled buildings — 55% of our portfolio will be ‘intelligent’ by 2023 — that are all electric, provide natural ventilation and designed with wellness in mind.”
The retail real estate market was arguably the worst hit during the pandemic. Fooftall tumbled to 80% below normal in the first lockdown, while online sales increased significantly. Reduced numbers of office workers and international tourists remained a constraint during the pandemic, accelerating existing trends impacting the high street. While there is still clear demand for physical stores in the right location amongst occupiers, the continued growth of online means there will be a reduction in the retail floorspace required, with CBRE estimating that the volume of retail floorspace in the UK will decrease by 16% to reach the average sales densities of 2015 – 2020.
The report calls for further actions to make the High Street a positive place to work and enjoy, including the creation of Meanwhile Use Registers for start-ups and SMEs to maintain the vibrancy of high streets.
Claire Barber, Asset Management Director, Cadogan Estate, said:
“In Chelsea there is a focus on independent brands and community uses, neighbourhood retailing such as the butchers, cheesemongers and cafes with al fresco dining, complemented by destination retail and continual animation through marketing events and initiatives. Going forward there will be continued focus on curation of the area including the public realm, to keep it vibrant and diverse.”
Jonathan Seager, Director, Place at London First, said:
“The pandemic has changed much about how we use space in the capital, but the demand for high-quality commercial property still remains. While market forces will direct much of what happens in terms of future investment, there is a role for public policy to navigate, ease and indeed direct change to support London’s economic recovery. A potential glut of old office space is both a challenge but also a great opportunity, but only if both national and London government can help smooth the way for investors to breathe new life into these assets.”